Japan Bear Market Gives Investors Bad Case of Déjà Vu

As Japan's Nikkei 225 tested bear market territory on Friday, investors are beginning to fear that they may have been overly optimistic about an economic revival in the world's third largest economy.

"People are wary of once again feeling that it's not going to work. I can't tell you the mass of clients who said 'I put money into the market in 2003, 1999,' failure, failure, failure," Ed Rogers, CEO, Rogers Investment Advisors, told CNBC, referring to the short-lived rally in both years, which was followed by a downward trend.

"They are all terrified of getting it wrong again, believing there's a recovery story when there's not," he added.

The Nikkei index fell to as low as 12,660 in the morning session – marking 20.5 percent downside from the peak 15,942 level hit in late-May. A bear market is characterized by a 20 percent or more decline in a market.

Why Money Hasn't Left Japan Yet

Peter Thal Larsen, Asia editor at Reuters Breakingviews, says that the fact that money hasn't left Japan yet is "a paradox" but expects a slow gradual move out of JGBs and Japan in general.

The Index pared back some losses in the afternoon session, closing down 0.2 percent at 12,877, which meant it had exited bear market territory for the moment.

The market was driven lower by a resurgence in the yen late Thursday—which strengthened to as much as 95.96 against the U.S. dollar. A stronger yen is typically negative for the Japanese market which has a heavy concentration of exporter stocks.

Disappointment over Prime Minister Shinzo Abe's longer-term growth strategy known as the "third arrow" of his three-pronged approach to turning around the economy has also been a drag on the market - which fell almost 4 percent on Wednesday after Abe delivered his plan.

Abe announced that he would be setting up special economic zones and pledged to raise incomes by 3 percent annually over the next decade, but economists told CNBC that the success of the plan, which comes after monetary and fiscal stimulus, would depend on proper implementation.

Rogers, who is bullish on the stock market over the long-term forecasting it could double from current levels over the next 2-4 years says it's "way too premature" to say "Abenomics" is going to fail: "That's the kind of conclusion people are trying to draw at the moment," he said.

Ben Collett, head of Asian equities at Sunrise Brokers in Hong Kong, said he wouldn't recommend reentering the market until a clearer base is formed.

"When you get a 20 percent down move in a market, people get more confidence about the bear case in Japan," Colette said.

"You need to let the market find a support. If we find stability around 12,500, traders and investors will put money to work. What you don't do right now is start running into this and start filling up the truck," he added.

A slew of economic indicators are also released out of Japan next week. These include first quarter gross domestic product estimates and current account data on Monday with a two-day Bank of Japan (BOJ) policy meeting concluding on Tuesday - all these will be crucial in determining the market's next move.

"The BOJ press conference on Tuesday will be crucial considering the big moves we've seen in the yen and Nikkei. Officials will want to steady the ship - they may say something that's a game changer," said Stan Shamu, market strategist at trading firm IG Markets.